TTM Technologies, Inc. (TTMI) Earnings Call Transcript

Hello, and welcome to TTM Technologies Second Quarter 2026 Earnings Conference Call. Please note that this call is being recorded. I will now hand the call over to Sean Hannan, Vice President of Investor Relations at TTM. Mr. Hannan, please go ahead.

Greetings, everyone. Welcome, and thank you for joining us today. I'm Sean Hannan, Vice President of Investor Relations for TTM. With me on the call are Edwin Roks, our President and Chief Executive Officer; and Dan Boehle, our Executive Vice President and Chief Financial Officer. Before we get started, I'd like to remind everybody that today's call contains forward-looking statements, including statements related to TTM's future business outlook. Actual results could differ materially from these forward-looking statements due to one or more risks and uncertainties, including the risk factors we provided in our filings with the Securities and Exchange Commission, which we encourage you to review. These forward-looking statements represent management's expectations and assumptions based on currently available information. TTM does not undertake any obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events or other circumstances, except as required by law. We will also discuss on this call certain non-GAAP financial measures such as adjusted EBITDA, such measures should not be considered as a substitute for the measures prepared and presented in accordance with GAAP, and we direct you to the reconciliations between GAAP and non-GAAP measures included in the company's earnings release, which is available on the Investor Relations section of TTM's website at investors.ttm.com. We have also posted on the website an earnings presentation that we will refer to during the call. Here is Edwin.

Thank you, Sean. Good afternoon, everyone, and thank you for joining us for our second quarter 2026 conference call. At TTM Technologies, we are focused on designing and manufacturing complex advanced interconnect products and printed circuit boards in addition to what we term up as up-to-chain products and solutions such as sophisticated RF modules, intricate subsystems and fully integrated mission systems. Core to the design of all our products and solutions as well as the key strategy to our business is innovative focus to satisfy next-generation needs for our customers and end markets, particularly regarding swap or size, weight and power. We believe the future of [indiscernible] lies in speed to market, high reliability and efficient technology integration and we consequently engaged early with our customers to ensure this alignment while also enabling optimal management of their complex supply chains. From a demand standpoint, we remain excited about the key mega trends of artificial intelligence and inference, which have been strong drivers of our performance and new business activity at TTM. We previously stated that approximately 80% of our net sales are related to these two megatrends, and we believe this will continue to put us in a beneficial position for our investors for the foreseeable future. We remain committed to [ transform ] capital and resource investments at our facilities around the globe to take full advantage of these opportunities. And we also plan to continue the pursuit of opportunities that enhance our business and financial strength with additive products, capabilities and geographic offerings through thoughtful strategic acquisitions. We are tracking well ahead of our previously communicated plan to achieve at least $4 billion in net sales in 2026 and our earnings for 2026 are exceeding our prior expectations as well as Dan will share [indiscernible] in his comments. With the continued strong demand involves artificial intelligence and defense, we also remain confident in our ability to achieve 15% to 20% organic revenue growth for 2027 and 2028 as previously shared. We will also provide further clarity on these out years next quarter as we develop our updated long-term plan. In our Commercial segments, we are highly focused on supporting the demand wave of artificial intelligence in the Data Center and Networking end markets. In this market, technology demand has been robust across our diverse set of customers, and we are particularly excited for our growth momentum as we've initiated the early stage of our full production launch of N+M our asymmetrical interconnected circuit boards. We are also focused on evolving opportunities in the use of automation and AI in our Medical Industrial and Instrumentation end markets, while we remain strategically positioned in Automotive for longer-term advanced technology cycles. In our Aerospace and Defense end market, we continue to excel with our leading position in advanced interconnect products as we work to expand our product offerings in integrated electronics and [ up-the-chain solutions ]. We remain quite encouraged by our opportunities, and we are very actively working to secure additional future awards or orders for the Golden Done program, multiple munition programs and in emerging technologies and companies. In the third quarter, we will begin the initial stages of ramping up volume for Ultra-HDI products at our new Syracuse facility. This plant is expected to continue into the fourth quarter and throughout 2027 to reach full capacity run rate at 2028. Operationally, in A&D, we are also very pleased with our progress on targeted initiatives to implement better pricing expenses, streamline our supply chain and drive manufacturing efficiencies which should all enable margin improvements in the long run. Towards the end of the second quarter, we announced our intentions to acquire 2 well-established companies in Europe which are privately held Swiss Technology Group AG, or STG in Switzerland and ILFA GmbH in Germany. [ This ] transaction is expected to close in the third quarter. From a model standpoint, these businesses are expected to contribute less than $0.05 of incremental sales and will be moderately accretive on an adjusted EBITDA basis. But most importantly, these strategic acquisitions will establish our initial footprint in Europe, adding healthy long-cycle businesses, primarily into Medical and A&D end markets with strategic technology capabilities that reinforce our up the chain value-add technology approach. This will serve as a first step toward our long-term vision to become a significant competitor in this [indiscernible] and we expect to continue to be opportunistic in the future for businesses that simulates such criteria. I'll now begin with an overview of our business highlights from the quarter. Dan will follow up with a summary of our Q2 2026 financial performance and our Q3 2026 fiscal guidance. We will then open the call to your questions. We delivered an excellent second quarter of 2026. And as always, I would like to thank our employees for delivering these results. We achieved sales of $1 billion, our first quarterly result reaching that thresholds, and non-GAAP EPS of $0.99 per diluted share, both above our guidance and both all-time quarterly highs. Sales grew 37% year-on-year reflecting continued demand strength in our Data Center and Networking end markets driven by the requirements of AI while our Medical, Industrial and Instrumentation and Aerospace and Defense end markets also experienced very strong growth. The company's adjusted EBITDA margin was 16.6% in the second quarter of 2026, up 160 basis points year-on-year and 90 basis points sequentially, largely reflecting positive mix impacts. Non-GAAP EPS of $0.99 per diluted share was a 71% improvement year-on-year. The Aerospace and Defense end market represented 37% of second quarter 2026 sales. Sales in the Aerospace and Defense market grew 14% year-on-year in the second quarter while the vast majority of our facilities performing at very strong levels. The sales growth in the Defense market continues to be a result of positive tailwinds in defense budgets our strong strategic program alignment and key bookings for new and ongoing programs. Our ability to support sustained longer-term growth is also very encouraging. We have many product innovation initiatives on track within our internal road maps, including unique advancements in printed circuit board technologies for materials that enable high frequency in support of all our applications. During the second quarter of 2026, we booked significantly Aerospace and Defense business related to APS-153, Multimode Maritime Surveillance Data, the ATP Sensor System for targeting and surveillance, Golden Dome and a number of projected priority respective programs. A&D book-to-bill was 1.3 for the quarter, which led to a total [indiscernible] backlog of $1.7 billion, up from $1.5 billion a year ago. We are also pleased to share that business proposals for this end market are at an all-time high with over $7 billion of potential business currently qualified in our strategic pipeline. For the third quarter of 2026, we expect this end market to represent 32% of our total sales and continue delivering both year-on-year and sequential growth. For the full year 2026, we now expect sales in this end market to grow in the low to mid-teens year-on-year. Sales in the Data Center and Networking end markets represented 40% of our second quarter 2026 sales. This end market experienced 91% year-on-year growth in the second quarter, above our growth expectations and reflecting continued demand strength from our data center and networking customers, building out the AI data centers. For the third quarter of 2026, we expect this end market to represent 49% of net sales as early stages begin for the planned ramp up to volume production of our N+M Asymmetrical Printed Circuit Boards. For the full year 2026, we now expect sales in this end market to more than double year-on-year. The Medical, Industrial and Instrumentation end markets represented 50% of our second quarter 2026 sales. This end market saw a year-on-year growth of 33% during the second quarter primarily aided by healthy demand in Medical, which is included support for major [indiscernible] monitoring products and Instrumentation for automated test equipment supporting AI solutions. Year-to-date, TTM's top 5 medical customers' performance have more than doubled our internal expectations, and we expect growth in this submarket to continue to be driven by demand of innovative products such as surgical robots, [indiscernible] physiology and continuous glucose measuring solutions. For the third quarter of 2026, we expect the Medical, Industrial And instrumentation end market to represent 13% of total sales, growing both sequentially and year-on-year. For the full year 2026, we now expect sales in this end market to grow 35% to 40% year-on-year. Automotive sales represented 8% of second quarter 2026 sales and was down marginally year-on-year. We continue to be very selective in this market to focus on higher value-add products that carry margin profiles consistent with our financial goals as we also believe long-term business cycles should migrate back towards our advanced capabilities. For the third quarter of 2026, we expect that Automotive market to represent about 6% of total sales, which reflects slight pressure in supply chain materials availability as CCL producers attempts to shift away from lower complexity materials towards higher complexity products. Given this dynamic, we are actively working with our supply chain products to secure adequate supply that is in line with our customer demand. For the full year 2026, we continue to expect sales in this end market to decrease in the mid-single digits year-on-year. The overall book-to-bill was 1.49 for the second quarter of 2026, with the Commercial reporting segment at 1.63 and the A&D reporting segment at 1.3. At the end of the second quarter of 2016, the 90 days backlog, which is subject to cancellations, was $901 million compared to $497 million a year ago, an 81% increase year-on-year. Now Dan will summarize our financial performance for the second quarter. Dan?

Thanks, Edwin, and good afternoon, everyone. I will review our financial results for the second quarter of 2026 that were included in the press release distributed today. Key financial highlights are also summarized in the earnings presentation posted on our website. For the second quarter of 2026 net sales were $1.0 billion compared to $731 million in the second quarter of 2025. The 37% year-over-year increase was due to continued strong growth in our data center and networking, medical, industrial and instrumentation and aerospace and defense end markets, partially offset by a more modest than anticipated decline in our automotive end market. GAAP operating income for the second quarter of 2026 was $109.1 million compared to GAAP operating income for the second quarter of 2025 of $61.8 million. During the second quarter, we also recognized a noncash pretax unrealized loss in the amount of $14 million from changes in the fair value of a deal contingent cross-currency swap we entered into in order to economically hedge the Swiss franc-denominated purchase price of the pending STG acquisition. We could not use hedge accounting since the deal had not yet closed. Therefore, changes in the fair value of the swap were required to be recognized in our GAAP earnings. On a GAAP basis, net income in the second quarter of 2026 was $83 million or $0.77 per diluted share. This compares to GAAP net income for the second quarter of 2025 of $41.5 million or $0.40 per diluted share. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes M&A-related costs, restructuring costs, certain noncash expense items such as amortization of intangibles, impairment of goodwill, stock-based compensation, gains on the sale of property, unrealized gains or losses on foreign exchange and other unusual or infrequent items. We present non-GAAP financial information to enable investors to see the company through the eyes of management and to facilitate comparison with expectations and prior periods. Gross margin in the second quarter of 2026 was 21.9%, an increase of 100 basis points from 20.9% in the second quarter of 2025. The year-on-year increase was due primarily to higher sales volume and favorable product mix, particularly in the Data Center and Networking and Aerospace and Defense end markets. Selling and marketing expense was $24.2 million in the second quarter of 2026 or 2.4% of net sales versus $20.3 million or 2.8% of net sales a year ago. Second quarter general and administrative expense was $49.3 million or 4.9% of net sales compared to $44.3 million or 6.1% of net sales a year ago. Our operating margin in the second quarter of 2026 was 13.8%, a 270 basis point improvement from 11.1% in the same quarter last year. The increase in the period was due both to the improvement in gross margin as well as operating leverage resulting from selling, general and administrative expense discipline. Interest expense was $9.9 million in the second quarter of 2026 compared to $10.6 million in the same quarter last year. Interest income was $1.9 million in the second quarter of 2026 compared to $2.2 million in the same quarter last year. Realized foreign exchange and other nonoperating income and expenses in the second quarter of 2026 totaled a net expense of $4.7 million as compared to net expense of $1.6 million in the same quarter last year. The increased expense was driven by the weakening of the U.S. dollar which resulted in a $4.9 million foreign exchange loss in the second quarter of 2026 as compared to a $1.4 million loss in the same quarter last year. Our effective tax rate was 15.0% in the second quarter of 2026, resulting in tax expense of $18.9 million. This compares to an effective tax rate of 15.0% or a tax expense of $10.7 million in the same quarter last year. Second quarter 2026 non-GAAP net income was $106.9 million or $0.99 per diluted share. This compares to second quarter of 2025 non-GAAP net income of $60.8 million or $0.58 per diluted share. Adjusted EBITDA for the second quarter of 2026 was $166.8 million, or 16.6% of net sales compared with second quarter 2025 adjusted EBITDA of $109.7 million or 15.0% of net sales. Cash flow provided by operating activities was $96.4 million in the second quarter of 2026, which compares to cash flow provided by operating activities of $97.8 million in the same quarter last year. Free cash flow in the second quarter of 2026 was $46.0 million as compared to free cash flow of $37.6 million in the second quarter of last year. Now we will provide our financial guidance for the third quarter of 2026 and an update to our outlook for the full year 2026. We project net sales for the third quarter of 2026 to be in the range of $1.10 billion to $1.14 billion and non-GAAP earnings to be a range of $1.21 to $1.27 per diluted share. These estimates exclude any contribution or impact from pending acquisitions. In addition, considering the current demand dynamics reflected in our first half results and third quarter guidance, we believe that the net sales growth should continue with a sequential uptick in the fourth quarter. Consequently, we now expect full year 2026 sales of approximately $4.4 billion and non-GAAP earnings to approach $5 per diluted share. These full year 2026 projections also exclude any contribution or impact from pending acquisitions. The third quarter 2026 non-GAAP diluted EPS forecast is based on a diluted share count of approximately 107.7 million shares, which includes the dilutive effect of outstanding stock options and other stock awards. We expect SG&A expense to be approximately 7% of net sales in the third quarter and R&D expenditures to be approximately 1% of net sales. We expect interest expense of approximately $11.3 million, interest income of approximately $2.5 million and realized foreign exchange and other nonoperating expenses of approximately $5 million. We estimate our effective tax rate to be between 13% and 17%. Further, we expect depreciation expense of approximately $33.5 million, amortization of intangibles of approximately $9.2 million, stock-based compensation expense of approximately $18.8 million and noncash interest expense of approximately $0.7 million. And finally, I'd like to announce that we will be participating in the Jefferies Semiconductor Conference in Chicago on August 26, The Jefferies Industrial Conference in New York on September 9 and the B. Riley TMT Conference in New York on September 10. That concludes our prepared remarks. So I'll turn it back to you, Justin, for the Q&A session.

[Operator Instructions] And we will take our first question from the line of Jim Ricchiuti from Needham & Company.

First question, I wonder if you can talk a little bit about the impact you may be assuming on revenues and margins from the N+M scale-up in Q3. If you can't provide specific numbers to it, I wonder if you could just speak about the impact qualitatively?

Jim, yes, thank you for being on the call. Happy to start this answer and then hand it over to Dan. First of all, yes, the second half of the year is, of course, a very big thing for us. It will be -- as you know, the Asymmetrical PCBs, the [indiscernible] kick in. So the good thing, Jim, is that we already delivered about tens of millions and yields are looking really, really well. But again, we have to do another about $600 million of that technology, which is a really nice technology. So that will help us in our margins, assuming that the [indiscernible] will stay all the same. So this is a thing to look forward to.

And so Jim, just to give a little bit more color. So Edwin just mentioned $600 million in the second half about 1/3 of that in Q3 and then 2/3 in Q4. So you see that ramp as we ramp production and then improve yields as well in the fourth quarter. So then the margin will kind of improve as well as those yields improve. So it will -- I won't quantify exactly what it will have. It depends upon how quickly we come up to that yield curve. But but it will improve the margins in both the third quarter and fourth quarter.

And of course, Jim, this is all building in our guidance for Q3. And since we guided also sort of for the year, you also had the Q4 numbers, correct?

That's our adjusted EBITDA margins.

Right. Okay. I wonder if you could talk to the number of 10% customers you may have had in the quarter. I know that the Q is -- it was just filed. I'm not sure if you disclosed it there, but I wonder if you can help on that score in terms of Defense and the presumably the Data Center area?

Sure, sure. And Jim, I'm always happy that, let's say, these 10% customers, which we disclosed in our 10-Q and 10-K are largely distributed over the 2 reporting segments. So 1 is, let's say, in our Commercial businesses, and one is in our Aerospace and Defense businesses. And I must say, in the Commercial business, it's getting a bit crowded. So there is another one which is getting very close to the 10% customer. So -- so we're in a pretty good spot. It's good to have 10% customers. It's also good to have a good distribution of customers. As you know, the hyperscalers and the networking guys we have about 10-plus of big, big companies in that field. And of course, you're very much aware on the Defense side, who our customers are, and that's also a nice balance. So again, one I'm happy with these big guys, the 10% customers, nicely balanced over the 2 important segments. We're also very happy with having these [indiscernible] of customer nicely distributed.

Got it. One quick question, and I'll jump back in the queue. It sounds like you're making progress in Penang. Are you pivoting now to producing product for the Data Center market from this facility?

Yes. Yes. I'm extremely happy about Penang, by the way. Penang is doing exactly what we told you guys have a year ago. It's -- we're getting to very decent revenue levels, very close to, let's say, a breakeven number, which we hope to get, let's say, late Q3, Q4. I think we are exactly on track. As I mentioned to you before, we are looking at the yields of some very important lead vehicles for our end customers. These end customers are still the same. We added even a few. So they are very happy. Most of that business in Penang, [indiscernible] is related to our MI&I business. But also, if I talk about N+M, which is one of the most difficult technologies we have in the company, I'm so happy that Penang is also doing N+M and indeed, supporting some of our some of our data center and networking customers. So a good mix, still mostly MI&I, medical instrumentation, industrial, but also some of the data center guys.

[Operator Instructions] And we will take our next question from Steven Fox of Fox Advisors.

I was wondering if you could dig in a little bit more into the sales pipeline you talked about in the aerospace and defense business. Any sort of gauge into how maybe your business either is changing or expanding? And what type of capability trends are you seeing that's needed there that maybe we haven't thought of yet? And then I had a follow-up.

Yes. Thank you, Steve. Good question. As you know, our Aerospace and Defense business is basically splitting into two. It's -- it's our PCB business, which is using the Ultra-HDI, and you saw the opening of Syracuse Diamond, which it really good and so helping us on our Ultra-HDI. The other part of the business, let's say, everything we do up-the-chain. So using our interconnect technologies to making modules, mostly RF modules, subsystems and systems, even complete radar systems. So that business is very balanced. The business is doing very well on the PCB side, but also very, very well on the interconnect -- sorry, in the electronics side. So that's going well on both ends. If you look at the customers, let's say, they're very active on both sides. So if you look at the book-to-bill, or if you look at the backlog, even better at the $1.7 billion, that's a very solid number. If I look at the pipeline, which we also review, of course, every month, we're getting over the $7 billion. And this is a qualified pipeline. So we see cover nice things happening both on mission side, that's probably the most [indiscernible]. That's mostly on PCBs, by the way. And we see a lot of things happening on the Golden Dome side. That's a good mix between both of the businesses. and then all the other things like communications and other applications. So Steve, a good mix in A&D, well positioned. I was on the Farnborough, a few weeks ago, all these large players, they come with additional demand. And it looks like sometimes we are the only supplier in the U.S. So this is very helpful. And also our international business, by the way, is growing very nicely, and we hope to grow that even further with the announcement of the 2 companies we addressed in our earnings release.